The revelation this week that Warren Buffett’s Berkshire Hathaway has a lax corporate governance policy has not only unleashed a torrent of criticism but also refocused some attention on past run-ins the well-respected investor has had with regulators and shareholders.
“Consider, after all, that if this is the behavior of the heir apparent David Sokol, who the heck knows what’s going on there?,” Jim Cramer, founder of financial publication TheStreet.com wrote yesterday. “What are the little, less-scrutinized and less-hyped individuals doing? Anything they want, on an honor system?”
In a letter to Berkshire shareholders, Buffett revealed that Sokol, whom many had viewed as a possible heir apparent to the 80-year-old Oracle of Omaha, bought roughly $10 million in stock in a company one week before he brought the company to CEO Buffett as a takeover target.
Berkshire, indeed, has offered to buy the company, Lubrizol, for $9 billion, sending its shares soaring and netting Sokol a profit of $3 million. While Buffett said Sokol did nothing illegal, critics blasted the chief executive for allowing a trusted lieutenant to engage in front-running the stock.
The Securities and Exchange Commission is said to be weighing a probe of the matter.
“Buffett has a good schtick,” agreed New York branding strategist Adam Hanft, speaking of the legendary investor’s tattered suits and folksy words of wisdom. That has given Buffett and Berkshire “a hall pass” that they probably don’t deserve, Hanft said.
As Sokolgate unfolds, a cursory look into Buffett’s history shows his pristine reputation has more than a few stains.
The best known black eye is General Reinsurance, a Berkshire subsidiary, which was found guilty of helping insurance clients like AIG paint an artificially rosy financial picture. Last year, General Re paid out $92 million to the SEC to settle the matter.
“We did something wrong and we paid the price,” Buffett told Fox News.
Buffett has been in the SEC’s crosshairs as early as 1974, when he and his buddy, Charlie Munger, Berkshire’s Vice Chairman, thwarted a buyout of Wesco Financial so they could buy it through a company that eventually gave the SEC $115,000 to end the matter.
Buffett was also reportedly examined last year for disclosures around a $26 billion purchase of Burlington Northern Santa Fe Corp. Buffett owned a big stake in the railroad before buying, but never announced his intentions to his fellow shareholders until the deal was sealed — a potential violation of SEC filing rules.
Meanwhile, Moody’s Investors Service said the departure of Sokol from Berkshire is a “credit negative” for Buffett’s firm.
The resignation points to “governance challenges” at the Omaha, Neb.-based conglomerate, Moody’s said. kwhitehouse@nypost.com